If you’re new to the world of credit, the experience of building your credit can be a frustrating one. People are going to tell you that a strong and stable credit history is crucial to having a good score. Having a good credit score is important, and this number alone can determine whether you’re getting approved for the credit card or loan you want. But what if you’re just starting out and don’t have any credit history to speak of?
Your credit score is calculated based on your credit report and is a way for potential lenders to assess the overall level of “risk” involved in approving you for a credit card or loan. Each of the three major credit bureaus calculate credit scores differently, but generally speaking, those calculations aren’t just based on your credit card payment history, but your overall track record in reliably paying debts that are in your name.
While it’s true that you can’t build your credit in a day or even a week, there are a few things you can do to start early and begin making an impact sooner. Here are the 6 things you can get started on:
1. Become an authorized user on another person’s credit card
One of the standard ways to build credit history is to get approved for a credit card and make regular monthly payments on it. Of course, that’s easier said than done if you’re in the catch-22 of not being able to get approved for a card because you don’t have enough credit history yet. A way to get around this limitation is to get your name added to someone else’s card.
Having authorized user status on another person’s credit card gives you the ability to “share” that person’s credit limit. You may receive a copy of the card as well. That said, there’s no requirement that you actually have to use that card. Before pursuing authorized user status on a credit card, there are a few steps you’ll want to take:
- Make sure the person you’re sharing the card with is responsible with their credit and makes regular payments.
- Confirm that you’re old enough to be eligible as an authorized user. Different credit card companies have different age requirements.
- Make sure the card company reports authorized users to the credit bureaus. Remember that your goal is to build your credit, and credit bureaus are the ones who calculate your credit score, so it may be wasted effort if it turns out the bureaus aren’t in the loop. Generally, the major banks report authorized users to credit bureaus, but it pays to confirm before applying.
2. Make student loan payments
For students who have taken out loans to help cover tuition fees, making regular payments on these can be a way of building credit without having a credit card to their name yet. Remember that this works both ways, however – missing a student loan payment can damage your credit.
3. Apply for a secured credit card
Applying for a secured credit card is one potential way you can start building credit by making card payments.
What’s the difference between a secured card and a normal credit card? Secured cards require the cardholder to pay a security deposit up front. That deposit then effectively becomes your credit limit on that card, as well as collateral for the card company in case you can’t make your payments. As a result, it may be easier to get approved for secured cards than a standard credit card, and they can be an effective way of building out credit history early.
Many credit card companies offer secured cards and we offer free and easy tools that can match you to a card that might work for your purposes.
4. Make sure your rent payments get reported to the credit bureaus
Rent payments can be a way to build your credit history even if you don’t have any credit cards. The general rule of thumb is for your rent to account for up to 30% of your income. That said, one-in-four renters are spending significantly more than 30% of their income on rent. If you’re putting so much of your income towards that one expense, you might as well leverage it to help build your credit.
It’s important to note that just paying your rent won’t improve your credit score by itself. Similar to becoming an authorized user on someone else’s credit card, you should confirm whether or not your rental payments are getting reported to the credit bureaus. While some corporate landlords may do this already, it’s possible that some independent landlords don’t report these payments to the bureaus.
Unfortunately, there isn’t a way to report your rental history to credit bureaus on your own, but there are rent reporting services that can help. Be sure to find a list of reporting services and do your research on which one would work best for you and be mindful that some services can include fees.
5. Put utilities in your name and make regular payments
If you live with your parents, your spouse, or other people and they are covering most of your household expenses, you can volunteer to cover some or all of the utility payments (for example your telephone, internet, water, and electric bills). Contact your local utility providers and put in a request service to have the bill under your name.
Even if your provider doesn’t report positive payment history to the credit bureaus, your account probably shows up on a specialty industry credit report. For example, the National Cable, Telecommunications and Utilities Exchange (NCTUE) is a specialty credit reporting agency that maintains and shares information about accounts with more than 60 large telecom and utility companies. What this means is that when the time comes to move, your account history will probably follow you to your destination, even in a new area.
You should only do this if you’re confident in your ability to make payments regularly. Like loans and credit cards, utility bills can actually hurt your credit if you miss payments.
6. Apply for a small personal loan
Before you explore this option, please consider any or all of the other tips above first. And for this option to work, you should have an active bank account in good standing
Start by applying for a small loan from your local bank or credit union first. Auto loans are also another potential way of obtaining a small loan. Paying back this loan regularly can help to improve your overall credit profile as a borrower. Of course, you’ll want to be very careful before applying for any kind of loan. When you apply for a loan the lender will run a hard inquiry on your credit history, which could temporarily lower your credit score.
Assess how much you can repay consistently, especially if there are outside factors, like employment status or income level, that might affect your ability to repay.
If you’re starting to build your credit, try out some of these methods to see if they work for you. Have you tried any of these tactics? How helpful were they for you? Be sure to let us know in our SesameThrive Community and share your experience with other Credit Sesame members!